A Free Trade Agreement (FTA) is a treaty between 2 or more nations to reduce barriers to imports and exports among them.
Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
While the specifics of each FTA vary, they generally help to create a more predictable and transparent trading and investment environment.
Types of Trade Agreements
There are 3 types of trade agreements used by countries engaging in international trade:
Unilateral Trade Agreements (UTAs)
UTAs are one-sided trade agreements often used by developed countries to promote economic growth and development in developing countries or to establish political alliances.
The developed country will lower or eliminate trade barriers such as tariffs, quotas, or other restrictions, allowing export and/or import from the developing country to the developed one.
UTAs can also be used as a tool to encourage economic reform and open markets in recipient countries, as the granting country can use its leverage to push for certain policy changes.
However, this type of trade agreement can also create trade imbalances and dependencies, and can be seen as a form of economic coercion. In addition, they can discourage recipient countries from engaging in reciprocal trade agreements or making their own policy changes.
Bilateral Trade Agreements (BTAs)
BTAs involve 2 countries that agree to loosen trade restrictions to expand business opportunities between them. The agreements can cover a wide range of issues, including goods and services, intellectual property rights, labour standards, and environmental regulations.
BTAs can provide a number of benefits, such as increased market access, lower prices for consumers, and improved economic growth and development. They can also help to establish closer political and economic ties between the 2 parties.
However, BTAs can be controversial and are often subject to criticism. There are arguments that the agreements can lead to job losses in certain industries, particularly in countries with weaker labour protections or environmental regulations. This can lead to countries completely neglecting labour and environmental standards to attract foreign investment.
Multilateral Trade Agreements (MTAs)
MTAs involve multiple countries negotiating to reduce trade barriers and increase trade and investment. The agreements aim to establish regulations that are agreed upon by all participating countries. These regulations can cover a wide range of issues, such as tariffs, intellectual property rights, services, and investment.
MTAs can provide a number of benefits, such as increased market access, improved economic growth and development, and greater predictability and stability in international trade. They also promote a more level playing field for all participating countries, as they establish common rules and standards.
However, MTAs can be difficult to negotiate and implement, as they require consensus among a large number of countries with diverse interests and priorities. In addition, some countries may be hesitant to participate in MTAs due to concerns about loss of sovereignty or perceived unfairness in the negotiation process.
Advantages of Free Trade Agreements
FTAs can provide numerous benefits for businesses and economies such as:
- Reduction or elimination of tariffs and enhanced market access
- Improved access to a wider range of competitively priced goods and services, new technologies, and innovative practices
- Promote regional economic partnerships and create shared approaches to trade and investment
- Deliver enhanced trade and investment opportunities that contribute to the economic growth of less-developed economies
- More transparent customs procedures that allow goods to be cleared faster and more efficiently
Disadvantages of Free Trade Agreements
While there are many benefits to FTAs, there are also arguments that the following disadvantages can weigh heavily on developing countries:
- Domestic industries may be unable to compete with foreign competitors, causing local unemployment
- Large-scale industries may move to countries with lax environmental and labour laws, resulting in child labour or pollution
- Developed countries may have a competitive advantage over developing countries, leading to a greater concentration of benefits for the former
- Reduced government revenue due to lowered or eliminated trade barriers, which may make it difficult for governments to fund public services and programs
Examples of Free Trade Agreements
US-Mexico-Canada Agreement (USMCA)
Type of trade agreement: Multilateral agreement
The USMCA replaced the North American Free Trade Agreement (NAFTA) on 1st July 2020.
It was created to benefit North American workers, farmers, ranchers, and businesses. The new agreement aims to create a more balanced environment for trade, support high-paying jobs for Americans, and grow the North American economy.
The agreement will also:
- Promote high labour standards and enforce workers’ rights.
- Make cross-border transactions easier and more predictable
- Prohibit customs duties on products distributed electronically
- Enhance protection and enforcement of intellectual property rights
- Help United States (US) suppliers receive fair and transparent treatment when supplying cross-border services
United States-Korea Free Trade Agreement (KORUS)
Type of trade agreement: Bilateral agreement
KORUS is the second largest US FTA by trade flows, after the USMCA. Within 3 years of entry into force of the agreement, nearly 95% of trade became duty-free.
It encompassed a wide range of important US exports, such as industrial and consumer electronic machinery and parts, power generation equipment, medical and scientific equipment, motorcycles, and certain wood products.
The agreement has reduced and, in most cases, eliminated tariff and non-tariff barriers between Korea and the US on manufactured goods, agricultural products, and services.
It has also set out regulations on investment and intellectual property rights, and detailed the mechanisms for resolving disputes. Furthermore, it commits both countries to maintaining certain worker and environmental standards.
Australia-United States Free Trade Agreement (AUSFTA)
Type of trade agreement: Bilateral agreement
Upon AUSFTA’s entry into force, more than 97% of Australia’s non-agricultural exports to the US (excluding textiles and clothing) became duty-free. Tariffs on important commodities such as lamb, sheep meat and horticultural products, also went to zero.
This FTA provides greater access to the US market for 2 of Australia’s key agricultural export industries, beef and dairy. Under this agreement, Australian companies also have access to the US federal government procurement market and the government procurement markets of 31 US states.